Surtax funds flowing in as federal funds dissipate

Photo | Courtesy of State House News Service House Ways and Means Committee Chair Rep. Aaron Michlewitz introduces Gov. Maura Healey's $55.5 billion fiscal 2024 budget bill Tuesday.

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The legislative budget writers who began their month-long inspection of Gov. Maura Healey's $55.5 billion state budget proposal Tuesday zeroed in on the responsibility they will have to simultaneously establish a process for handling new revenue from the state's income surtax and manage the steady phase-out of federal aid that helped prop up numerous programs for the last few years.

Healey's fiscal 2024 budget (H 1) anticipates that the state will take in at least $1 billion in revenue from the new 4 percent surtax on income that exceeds $1 million. The money is supposed to be used only for education and transportation initiatives under the constitutional amendment that voters approved in November, but it will be up to the Legislature and administration during the budget process to write the actual rules for how surtax revenues are to be accounted for and spent.

"The structure of how those funds will be used and the details of where the money will go will be critical to iron out, especially in this first year," House Ways and Means Chairman Aaron Michlewitz said Tuesday at the start of the committee's first hearing on Healey's budget. "A lot has been said about the impacts this amendment will have on our economy. And while that will take some time to play itself out, it is our job on this committee to cut through the noise and deliver new initiatives that will be thoughtful and effective."

Healey's administration has proposed to create a new Education and Transportation Fund to serve as the repository of all surtax revenues, and to restrict that fund to being spent only towards education and transportation. The fund would receive all surtax revenues and its balance would not revert back to the General Fund at the end of a budget year. She is also seeking to exclude surtax money from any future calculation of state revenue for the purposes of Chapter 62F, the state revenue growth cap law that last year triggered nearly $3 billion in mandatory rebates, and to shield surtax receipts from the existing requirement that capital gains revenues above a certain level be stashed into state savings or put towards specific benefit accounts.

The proposal also calls for a required minimum fund balance that Administration and Finance Secretary Matthew Gorzkowicz said would be set at one-third of the fund's recurring spending, includes an annual recurring spending cap that would rise or fall apace with surtax revenues, and would require a two-thirds vote of the Legislature to access money in the fund similar to the requirement for withdrawals from the Stabilization Fund.

"This long-term sustainable planning is a key feature of the FY24 budget recommendation and the administration's philosophy on maximizing the impact of available resources," Gorzkowicz said.

Michlewitz brought up the subject of what to do with surtax revenues again later in Tuesday's hearing after Treasurer Deborah Goldberg testified. Michlewitz asked Goldberg whether any of the credit rating agencies had voiced an opinion on the impact of the state's new surtax or how its revenues should be handled.

"Specifically and recently, we have not heard anything directly from the rating agencies with respect to it, but in listening to the proposals and the strategies that we've shown through both the supplementary budget and the proposals coming forward into the budget, these are the kind of strategies that the rating agencies have been looking at in terms of continuity of strong fiscal policies and strategies in terms of utilization," the treasurer said.

As the Legislature and administration try to figure out how to incorporate surtax revenues into the annual spending plan, they will also have to decide how to address the billions of dollars in federal money that will soon be coming off of the state's books.

The federal government provided about $14 billion to be spent by Massachusetts state and local government in response to the COVID-19 pandemic that started three years ago, but that support is coming to an end with the federal public health emergency that is poised to expire May 11.

"The commonwealth has picked up the cost for some of these programs over the last couple of years, such as universal school meals," Michlewitz said. "However, a longer-term more fiscally realistic approach needs to be addressed as we determine how to best manage this phasing out of certain federal programs going forward."

Healey said Tuesday that her budget and other legislative proposals seek to provide "people with the basic glide path off of this," particularly when it comes to programs around housing and food security.

Her budget also includes $2 million to stand up a new Federal Funds and Infrastructure Development Office that could take what the administration said would be "a new, more proactive approach to federal funds" and competing for grants from the feds.

"The Commonwealth of Massachusetts is well-positioned to compete and win federal resources for key priorities due to its highly educated workforce and robust innovation economy. These strengths must be complemented with a relentless, priority-driven pursuit of federal resources, proactive coordination and support, a streamlined and simplified approach to resources, and transparent data-driven management to bring more federal money to the Commonwealth," Assistant Secretary for Federal Funds Heath Fahle wrote in a budget brief.

On Tuesday, the governor told the Joint Ways and Means Committee that she would do "whatever I can do in terms of advocacy vis-a-vis the Biden administration with respect to making some allowances or changing the course of some of what is happening around the end of the public health emergency."

"I was in D.C. a few weeks ago, we had that very conversation about whether adjustments need to be made. And so to the extent it may be helpful, know that I stand ready to be an advocate with all of you vis-a-vis the federal administration on some of this," Healey said. "In the interim, though, we tried to offer what we thought might make sense looking at the whole picture in terms of the numbers."

After the hearing Tuesday, Healey told reporters that she had no specific requests for the federal government, but wanted lawmakers know that she would be open to making requests on their behalf.

"My comment to the Legislature was just to say, let me be here as an advocate for our state and if there are things that we need to ask the administration to consider as we move forward in the coming months with the expiration of the federal public health emergency, know that I will do that as your governor," she said.